IAI Actuarial Core Principles · Business Economics · Impact of macroeconomic policies on businesses
In an economy, the marginal propensity to consume out of disposable income is 0.75 and there are no taxes on income, imports or leakages other than saving. The government increases spending by ₹400 crore. What is the total increase in national income according to the simple multiplier?
The increase is ₹1,600 crore. The simple multiplier equals one divided by one minus the marginal propensity to consume, which is 1/0.25 = 4, and multiplying this by the ₹400 crore spending rise gives the total income change.
- A₹300 crore
- B₹533 crore
- C₹1,200 crore
- D₹1,600 croreCorrect
- ₹2,000 crore
Explanation
The multiplier is 1/(1-0.75)=4. The income rise is 4 x 400 = ₹1,600 crore. The figure of ₹1,200 crore comes from using MPC/(1-MPC)=3, which is the tax-free consumption-only multiplier and so omits the initial injection.
Did you get it right without looking?
One question tells you little. A timed set on Impact of macroeconomic policies on businesses shows your real accuracy, how long you take and where you lose marks.
More Impact of macroeconomic policies on businesses questions
- Which of the following is a supply-side policy instrument, as opposed to a demand-management instrument, for achieving the objective of sust…
- A central bank with an inflation target observes that inflation is above target and the economy is at full employment. Which action is consi…
- Wages in an economy rise by 6% in a year while labour productivity rises by 2%. Assuming that firms pass on cost increases fully and labour …
- Which of the following is best classified as a supply-side policy intended to raise the long-run productive capacity of the Indian economy?
- Consumer price inflation in India rises unexpectedly from 4% to 7% a year. A life insurer has sold a large block of long-term guaranteed-ben…
- An economy has a marginal propensity to consume of 0.8, a marginal tax rate of 25% on income, and a marginal propensity to import of 0.1. Th…